Fitch Ratings has affirmed Uganda’s Long-term foreign and local currency Issuer Default Ratings at ‘B’ with a Stable Outlook and Short-term foreign currency IDR at ‘B’. The agency has also affirmed the Country Ceiling at ‘B’.
Uganda’s ratings balance its track record of macroeconomic prudence against its weak business climate and low per capita GDP ($551 against $3,399 for the ‘B’ median in 2011). Growth has been impressive over the past 15 years, helping to lift 23 million people out of abject poverty.
However, recent growth of 5%-6% has been below trend, which is particularly concerning given the high population growth rate. Uganda’s policy agenda and commitment to address infrastructure constraints have lagged behind regional peers, making it imperative that Uganda regain its reform momentum at the risk of eroding its growth record.
The discovery of oil, which could see initial output of 100,000 b/d in 2016/17 offers an important opportunity in terms of expanding the export and revenue base as well as much-needed funds to finance infrastructure development.
However, Fitch is concerned that continuous delays and extended negotiations could see the onset of oil production prolonged further.
As a result, the expected benefits to Uganda’s creditworthiness from improved growth potential, public finances and the balance of payments could be further deferred. Like its regional peers, inflation in Uganda accelerated sharply last year to 30% year -on-year in September 2011, as demand-side inflation was aggravated by high commodity prices and a sharp depreciation of the exchange rate. The Bank of Uganda hiked rates aggressively towards the end of the year to 23%. Combined with a recovery in the exchange rate, this has helped reduce inflation to 5.4% in September.
Interest rates have declined sharply in response to lower inflation, easing to 13% in early October. While this will help to support growth, it does pose some risk to the exchange rate.
The shilling has benefited from strong inflows into the domestic bond market totalling roughly $282m over the past year as investors took advantage of high yields.
These flows could weaken or even reverse as interest rates decline. Uganda’s fiscal regime was challenged during 2011/12 financial year, due to weaker than expected economic performance. Gains in oil revenue failed to offset lower than projected tax revenue as well as donor disbursements.
The fiscal space was further constrained by higher interest costs. In 2012/13 financial year, the deficit is expected to decline to 4.2% of GDP from 4.6%. The authorities have restated their commitment to tight fiscal policy by containing current expenditure in order to restore macroeconomic stability, while maintaining sufficient room for public investment.
Rising public debt to fund much-needed infrastructure will need to be carefully managed to ensure debt dynamics remain favourable.
Key debt ratios remain below ‘B’ peers, but external borrowing is set to rise further, potentially by as much as $2.6b given the stock of undisbursed commitments.